Vaughan Blank worked for various Glencore companies around the world from the early 1990s until 2006, becoming an Australian resident in 2002. When he left Glencore in December 2006, he had a bewildering collection of rights in two companies accumulated during his employment under Glencore’s employee profit participation plans as varied, supplemented and replaced over the years. Some of the arrangements involved rights to future cash payments while other involved Glencore entities issuing shares to Blank. Sometimes Blank got his rights for free and sometimes he was required to pay money to Glencore entities in pursuance of the plans.
In March 2007 he gave up all his rights against the two companies and transferred all his shares in exchange for USD 160m, payable in 20 instalments over the next 5 years. Part of this amount was treated as a dividend under Swiss law and Blank paid Swiss withholding tax. In his 2006-07 tax return, Blank treated this as a discount capital gain of AUD 100m earned entirely in 2007. The ATO initially agreed, and then had second thoughts.
The ATO’s position has varied over the years, arguing the undiscounted amount of AUD 200m was assessable:
- as ordinary income from employment, assessable over 5 years,
- as ordinary income from a profit-making venture to realise his assets at a profit,
- as ordinary income earned as a return on assets that he held,
- as eligible termination payments (or subsequently, employment termination payments), and
- as a dividend or a non-share dividend.
Once the matter became contentious, the taxpayer decided to counter with his own arguments that:
- he had a deemed cost in the rights he surrendered (being their market value at the time he became a resident in 2002), reducing his capital gain substantially, and/or
- the amount was derived from foreign service and exempt from Australian tax.
Neither side has argued that the various arrangements gave rise to an employee share acquisition scheme.
Edmonds J at first instance, and a majority of the Full Court, took the view that the entire amount was assessable as ordinary income, essentially deferred payment for services he performed over the prior 15 years. Pagone J dissented, taking the view that the amount was a capital gain. Both courts heard detailed arguments about the value of the rights in 2002 [AUD 77m v AUD 103m] but valuation disagreements became irrelevant once the majority treated the amounts as ordinary income.
The taxpayer was granted special leave to appeal to the High Court in May and both parties have just lodged their formal submissions. One might have thought that most of the peripheral arguments would have fallen away by now and the case would revolve around just 2 key questions: (i) is the amount to be assessed as employment income, an ETP or as a capital gain, and (ii) if it is a capital gain and Blank has a deemed cost base in the rights he surrendered, how much is the cost base? But it seems everything (except the ATO’s dividend argument and the taxpayer’s foreign income argument) is still on the table.
And if the case is not difficult enough already, it also involves a cross-border hybrid – apparently the Swiss see a dividend in part, and we don’t; they also see a deduction in part, and we may only see a discounted capital gain. These disagreements are just the kind of situation that might be affected by the Board of Tax’s hybrids project.
The matter is set down for hearing in Canberra on 23 August.